Top Tabs

Wednesday, April 14, 2010

A Lot To Like

Imagine a company that doesn't hand out stock options, but where management owns a significant but non-controlling stake in the company. Now imagine that its CEO has been at the helm for almost 25 years, slowly building up his personal wealth by growing the company's stock by double-digits annually, employing little to no leverage in the process.

Such situations are rare, but they do exist. Now imagine that you can buy a stake in such a company at an attractive price, due to the fact that its industry is going through a cyclical downturn.

Consider Jewett Cameron (JCTCF), a company that sells wood, metal, seeds and industrial products to retailers, manufacturers, and builders. Revenues for this company have plunged, as it was exposed to two groups that have been particularly hard-hit by this recession: boat manufacturers and home builders.

But Jewett has shown an uncanny ability to weather the storm, as it remains profitable despite a 30+% drop in revenue. The company was able to reduce its headcount by over 20%, and fold in some of its operations into its owned facilities, thereby reducing leasing costs.

While the company both trades for and has shareholder equity of $18 million, its book value is likely understated due to the value of its land holdings. Most of its land holdings were acquired and built in 1995, and have been carried at cost since then. But the company owns over 18 acres of land, including over 140,000 square feet of office, manufacturing and warehouse space just a 25 minute drive from downtown Portland, Oregon. The fact that the company has been able to derive average returns on equity of 15% over the last five years suggests that either the company is getting more use out of its land than the land carrying value would suggest its worth, or that it has some competitive advantage. After subtracting the company's cash balance, the stock trades with a P/E under 10.

When the incentive structure for an able management is properly set up, the potential for success increases significantly. In the case of Jewett Cameron, management shares with other shareholders both the downside risk that comes with failure, and the upside potential that comes with success. Furthermore, with a strong record of success over the long-term, management has proven its ability. With the current economic situation keeping revenues low, shareholders may currently be offered an opportunity to buy into this company at an attractive price.

7 comments:

Description form bbg: Cambrex Corporation supplies health, agriculture, and biotechnology products tothe life sciences industries. The Company also produces specialty chemicalsthrough its subsidiaries in the United States and Europe. Cambrex's productsinclude cell culture and endotoxin detection products, pharmaceuticalingredients, and chemicals used in health, beauty, and food products.

From website, seems like one big prodcut is this "camouflage" coating they sell to generic pharma companies that masks the taste of bad tasting stuff.